3 German language area

Transkript

1 3 German language area First half of the twentieth century Introduction At various times, the leadership in accounting thought fell to different countries or language areas. During the first half of the twentieth century this leadership was claimed by Germany (for evidence, see section 3.8), just as it was transferred in its second half to the English language area. At a first glance one might have expected Great Britain with its advanced industrial, commercial and financial status, and an unmatched tradition of great economists (Adam Smith, David Ricardo, William S. Jevons, John Stewart Mill and Alfred Marshall) to take the accounting lead in the early twentieth century. Yet, perhaps the British tradition of training lawyers and accountants in actual practice (rather than at universities) prevented this. Add to this the disdain of many economists and other scholars for commerce and accounting, and you obtain an explanation (cf. Napier 1996). 2 In Germany, industrialization took place during the second half of the nineteenth century (more than a century behind Great Britain) and was accompanied by developments in original accounting thought. Towards the end of the nineteenth century a series of outstanding personalities arose in Germany, Switzerland and Austria. They combined a sound and practical sense of business with the gift to apply this intuition and knowledge in a logical and scientific fashion to the needs of an ever-increasing industrialization and commerce. Many of these thinkers (including Nicklisch, Schär, Töndury and Penndorf ) 3 are hardly known in the English language area. All of these were born in the nineteenth century, but still carry high prestige in continental Europe. Yet, these were just the cream of the crop, and many other names could be added. This array of talents was accompanied and greatly enhanced by the emergence of a series of institutions of higher business education, of university rank. From 1898 to 1910 no less than nine such Wirtschaftshochschulen or Handelshochschulen were newly founded in the German language area: in Aachen, Leipzig, St Gallen and Vienna (all in 1898), in Cologne and Frankfurt a.m. (1901), in Berlin (1906), in Mannheim (1908) and Munich (1910). For this period, it is difficult to separate the concern for accounting from that for business studies in general. And it is no coincidence that up to the end of the twentieth century, German accounting was treated as a major and integral part of

2 42 German language area (1) business economics. Generally, this term is translated as Betriebswirtschaftslehre, but Betrieb usually means plant or any other place where operations (betreiben = to operate) are going on. Thus Betriebswirtschaftslehre is not necessarily confined to the study of business activities but may refer equally to non-profit and governmental institutions (cf. Murphy and Most 1959: 5). Furthermore, the German literature distinguishes between allgemeiner (general) Betriebswirtschaftslehre and various specializations (for banks and financial institutions, transportation, small business, etc.). Schneider, in reference to the birth of Betriebswirtschaftslehre, stated: The first general Betriebswirtschaftslehre, transcending the framework of commercial techniques, was written by... Heinrich Nicklisch [ ].... A first useful basis for dispersing this knowledge was created in the text by Nicklisch (1912) and to a lesser extent by Schär (1911).... The climax, from a decision logical point of view, was achieved by Eugen Schmalenbach within the new scientific community. (Schneider 1981a: 130 1, translated) This integration of accounting stands in contrast to the treatment in the English language area, where it assumed a more independent role, and where there was no substantive emergence of a body of economic theory relating specifically to business (Napier 1996: 449). The relative isolation of accounting and law from other business subjects in Great Britain during the first half of the century may originally have created an academic tunnel vision about business subjects, and may have temporarily impeded creative accounting research. But during the second half of the twentieth century, when the need for increasing specialization arose, the more independent status of accounting in the English language area proved to be a boon a possible factor why German accounting research lost its lead to North America. Despite the German endeavour of integrating all business subjects in a single discipline, it was not possible to construct a common theoretical foundation covering all aspects of business economics (Busse von Colbe 1996: 413). This confirms that the pursuit of such an ambitious goal as that of Betriebswirtschaftslehre may have been misconceived, at least in the long run. A further German feature, shared with other continental European countries, was the strong interest in theories of accounts (Kontentheorien) which ultimately led to an intensive occupation with charts and master-charts of accounts (Kontenpläne and Kontenrahmen). While a third feature, particularly of German accounting, was the emphasis on the balance sheet under the term Bilanztheorie (BT). The term Bilanz may occasionally refer to the entire accounting system, to the balance sheet and income statement, or to the balance sheet alone. 4 It is notable that the German accounting literature of this period included a series of significant publications by foreign authors; for example Gomberg (1908) from Russia, Kovero (1912) from Finland, and Ciompa (1910) from Poland. Similarly, many foreign authors published in the English accounting literature during the second half of the twentieth century for the sake of broader exposure.

3 German language area (1) 43 In both situations, this is also a manifestation of the prestige of the accounting literature of a specific language. Fourth and finally, the relationship of accounting to German codified law is fundamentally different from that of accounting to the common law in America or the Commonwealth countries. Closely connected with such legal aspects is the status of private sector accounting bodies. Thus, in the German language area, professional accounting standards cannot (at least not to the same extent) function as quasi-legal regulation, as they do in countries adhering to the British and American tradition. 3.2 Accounts as the centre of theories The cradle of modern accounting research, in Germany and elsewhere, lies in the nineteenth century (for details, see Mattessich 2003). At the beginning of the twentieth century, German accounting was dominated by a series of competing theories of accounts, most of which had their roots in bookkeeping theories of previous centuries. In the German language area of the late eighteenth and early nineteenth centuries the pioneers of the personalistic one-account class theory (see below) were Büsch and Buse, and in the late nineteenth century Scherber, Odenthal and others (see Sykora 1949). In the long run, the most successful theory seems to have been Hügli s materialistic theory of two accounts classes. This was further developed by another Swiss, Schär (1890, 1911, 1914), whose closed accounts system was regarded by Scherpf (1955: 8) as the first chart of accounts in the proper sense. 5 However, in general, accounting practice before the First World War was too liberally oriented to show much enthusiasm for uniform or even semi-obligatory charts of accounts, and many practitioners, as well as academics, held such an undertaking (either in certain industrial sectors or in general) to be unrealistic (cf. Meyerberg 1913). Nevertheless, individual theories of accounts and the rivalry between them flourished, and Holzer (1936) even attempted the axiomatization of theories of accounts classes though this was hardly an anticipation of the more rigorous axiomatization attempts of accounting theory from the late 1950s onwards. From the point of view of accounting theory, Holzer (1936) seems to have leaned in the direction of Schmidt s organic theory, and against Walb s finanzwirtschaftliche theory (see below). In this maze of competing classification schemes, a major criterion was the distinction between personalistic theories and materialistic (or better, nonpersonalistic ) ones. The former tried to identify every account with a person responsible for it, while the materialistic theories derided such an attempt. Another criterion was how many classes of accounts were used. Their numbers originally ranged from one to about five. 6 Many combinations of these two criteria existed. But there were also theories beyond those of mere accounts classification. These, and the classification theories, were variously interpreted by different historians. All are formalistic-classificational, and thus can hardly solve factual problems. Just as there are many equivalent theories of standard logic, so there

4 44 German language area (1) exist many equivalent systems of accounts classification. However, classification schemes may not be arbitrary when it comes to reflecting the structure and objective of a specific firm or part of it. Below we concentrate on the more prominent German names and publications of this period: 1 Personalistic theories with one class of accounts : These were based on the shorthand equation (A L OE) = 0. This was supposed to indicate that all accounts, be they of assets, liabilities or owners equity, were regarded to be identical counting devices. This theory belonged mainly to the nineteenth century, although von Ullmann (1904) and Kohlmann (1902/05) still propagated it in the twentieth. 2 Materialistic theories with one class of accounts : The term materialistic did not imply any empirical-theoretical basis but mainly served to distinguish it from the personalistic theories, indicating that every account represented a real counting device independent of a person. This category, too, was a remnant from previous times, but Novak (1902), Berliner (1909, 1911) and, in a somewhat different form, Seidler (1901) continued to promote it. 3 Materialistic theories with two classes of accounts : This was undoubtedly the most successful category, and it had many variations. In one version the basic equation is (A L) = OE, which was to indicate that the accounts of assets and liabilities form one single category, and those of owners equity form the other. This theory was advanced by Hügli (1900, 1923), Ziegler (1904), Calmes 7 (1906, 1910) and, above all, Schär (1911) who classified transactions into those referring to (1) exchanges of stocks and similar items (Bestände), (2) changes affecting the profit and (3) mixed transactions affecting either. He employed a more refined and comprehensive algebraic representation of those transactions. Another version, where the equation A = (L + OE) indicated that the asset accounts form one class but the equity accounts (external and internal equities) form the other, was typical of the theories of Ciompa (1910), Nicklisch (1912a, 1912b, ) and Isaac (1929). A similar and particularly popular version emphasized the capital as a whole (be it foreign or owners capital: value of assets = value of capital). Yet, such an interpretation overlooks that legal claims (whether they are capital from outsiders or owners) are a social reality, and not something abstract (i.e. unreal or merely conceptual). 8 At any rate, the distinction between liabilities and owners equity was somewhat diminished. Such a view was advanced by Nicklisch (1912a, 1912b) and further propagated by Osbahr (1913), Becker ( ), Geldmacher (1914) and Großmann (1921, 1922), as well as Seidel s (1933) Bewegungstheorie (movement theory). 9 4 Materialistic theories with three classes of accounts : Their basic formula was A = L + OE, indicating that asset accounts, liability accounts and owners equity accounts were considered completely separate categories. The representatives of this theory were K. Lehmann ( ), Skokan (1914, 1918), Leitner (1922a) and le Coutre (1924).

5 German language area (1) 45 There were further theories independent of accounts classification: The historically founded accounts theory of Buhl (1929a; see also 1929b and 1929c) was, at this time, an interesting attempt to explain contemporary accounting and bookkeeping from an historical point of view. However, in the light of modern archaeological knowledge (cf. Schmandt-Besserat 1992; Nissen et al. 1993; Mattessich 2000) such explanations are no longer acceptable. The juridical bookkeeping theory of Kempin (1910a, 1910b) not only emphasized the legal dimension, as its name suggests, but also the oppositional relation between manager and owner. This may have foreshadowed aspects of agency theory which became popular in the 1980s. Another prominent legalistically oriented scholar was Passow (1910), who opposed some legal conventions that promoted exit (sales) values. Enderlen (1936), one of the female authors (rare at the time), put special emphasis on the juxtaposition between the nominal versus the real balance sheet. The realistic theory of Sganzini (1906, 1908) attributed the objective aspect to the conversion process of money into goods and again into money; while the subjective aspect became the firm s goal to make a profit through performance of useful services. The distinction between calculation [Rechnungs-] accounts (cash, receivables, etc.), on the one side, and control accounts (goods, machinery, plant, etc.), on the other side, played a significant role in this theory. But more importantly, Sganzini s theory anticipated Schmalenbach s dynamic accounting, as well as some of its improvements by other authors (see below). 10 The theory of Gomberg (1908) pivoted on the firm s economic cycle. It emphasized its cause and effect relations in such a way that budgeting, cost accounting and financial accounting worked together. Gomberg (1927) later developed another theory that used a geometric matrix form with separate classes for statistical, juridical and economic events. A Russian-Swiss scholar, he taught first in Geneva and later became a professor in St Gallen; he thus published not only in Russian and French (e.g. Gomberg 1897), but also in German. His major works were in theoretical accounting and accounting history. Gomberg is regarded as one of the most original accounting scholars of his generation (cf. Töndury 1933: 97 8, and Melis 1950: 791). Schneider points out that his [Gomberg s] teaching, which could have led directly to the modern approach of business economics, finds no response with the first generation of business economists (Schneider 2001: 194, translated). Another scholar from a Slavic country, Ciompa (1910), presented his econometric accounting, based on economic theory which, however, has no affinity with the modern notion of econometrics. It used current replacement costs or, alternatively, (discounted) sales values that enabled a separation of realized from non-realized gains. But unlike Kovero (1912), he did not separate corresponding losses in the same fashion. As to the so-called Kreislauftheorie (cycle theory) of Pape (1920) and the Zahlungsleistungstheorie (payments and performance theory) of Walb (1926), both belonged to the two-accounts series: capital goods vs. capital sources in

6 46 German language area (1) the case of Pape; payments vs. performance in the case of Walb. The former theory was of a static nature and looked at the accounts as measurement instruments, while the latter was more dynamically oriented, such that the profit and loss account summarized the performance, and the balance sheet summarized the payments. The double determination of income (in the profit and loss account as well as in the balance sheet) received particular emphasis by Walb. 3.3 Inflation after the First World War and accounting theories Whereas the theories of accounts classes were derived from the nineteenth century, and were a major concern of pre-war bookkeeping theory, the time between the two World Wars created an entirely different economic situation. In consequence of this, the interests of academic accountants turned to other problems, though the attempt to construct new or defend old theories of accounts continued even into the 1960s and 1970s (e.g. Käfer 1966: 39 68; Seicht 1970a: 66 9). Following the First World War, a major concern in Germany and Austria was hyperinflation and its accounting treatment. Of even greater theoretical interest were the competing Bilanztheorien that had slowly developed since the late nineteenth century, and became particularly prominent during the second decade of the twentieth century The impact of hyperinflation The German post-war inflation, including the devastating but relatively shortlived hyperinflation (from about June 1921 to November 1923) and the inflation in Austria (with its hyperinflation phase from about 1918 to 1922), stimulated a host of accounting literature. Thus the works by Prion, Schmalenbach, Schmidt, Mahlberg, Isaac and Haar, among others, attained special recognition. 11 These publications influenced other writers, even beyond the German language boundary, particularly in France and later in America. French accounting experts 12 took up this topic and made further original contributions during and after the subsequent French post-war inflation (from 1925 to 1927) (for details, see Degos and Mattessich 2003). The American Henry W. Sweeney (1927, 1928) also became interested in this literature, while another American, Livingston Middleditch, anticipated by a few years some aspects of that particular German accounting literature. Schneider (1981b: col. 624, translated) characterized the success of inflation accounting as follows: The detailed analysis of accounting under conditions of inflation and value-fluctuation, is one of the few achievements in which German business economics attained originality on a world scale. Later, Schneider (2001: 202) added to these original German contributions another one: cost considerations for minimal pricing (Überlegungen zu Preisuntergrenzen). Mahlberg (1921) initially presented an inflation adjustment procedure based on the medium price of gold (cf. Schneider 2001: 985), but later followed

7 German language area (1) 47 Schmalenbach (1921), who used what Graves et al. (1989) called forward indexation. Schmalenbach s concern with inflation adjustments did not arise from his dynamic accounting (with its bent for nominal capital maintenance), but was made reluctantly, and only under the pressure of dangerous inflationary conditions. The concept of forward indexation was designed to adjust income and balance sheet data at year s end to rectify the distortions introduced by an accelerating inflationary process. These distortions referred not only to deceptively high income figures but also to investment, costing and pricing policies of individual firms, as well as a taxation policy that contributed to the further erosion of proper capital maintenance. As the hyperinflation accelerated, this model had to be improved, be it because of too great a volatility of the purchasing power of money, or too little homogeneity of accounting data, or because of the need for a more generally acceptable solution. Hence, Schmalenbach (1922a, 1925), as well as Mahlberg (1923), considerably extended their models (cf. Graves 1989). A common confusion to be dispelled about gold-mark accounting is the belief that it had to be based on gold and its price. Schmalenbach (1922a: Section IV) suggested three possible bases: some foreign exchange index (e.g. US$): the price of gold, or some German price index (e.g. the wholesale index). His subsequent discussion did not favour the relatively volatile price of gold, but rather some kind of commodity index or an exchange rate with a stable currency. Schmalenbach (1925) compared the different approaches as follows: One compares the value of money as of two different dates, and if those values differ, one places them on an equal footing. Either all values at the end of the period are stated in terms of the value of money at the beginning of the period, or all values are stated in terms of the value of money at the end of the period, or all values are stated in terms of a gold mark.... The method of restating successive period-end values in terms of the same base value has a number of important advantages. It produces comparable results from period to period in regard to details as well as in general. In addition, and this is of utmost importance, it records for future reference the values of certain prices and returns that otherwise are lost in the inflationary spiral.... The method of restating beginning values in terms of period-end values is useful when restatement need not occur regularly, but is required for a particular year. It allows integration of the restatement into the ordinary accounting process, while restatement in terms of gold requires a special calculation of its own. (Schmalenbach 1925; as translated by Graves et al. 1989: 106) In the same publication, Schmalenbach offered a comprehensive illustration of a gold-mark adjusted accounting system in three different versions: (1) through monthly restatement on the basis of the official wholesale index,

8 48 German language area (1) (2) through annual restatement based on the same index and (3) through annual restatement on the basis of the gold index of the Frankfurter Zeitung. Although a comparison of the actual results of those alternative approaches showed marked differences, Schmalenbach concluded that those differences had relatively little effect upon income determination. In contrast to all this stands Schmidt s (1921) work with its current market (replacement value) basis. Despite the fact that it grew out of the need for some kind of inflation adjustment, its basic thrust was towards the shift of individual (instead of general) prices. Such shifts occurred constantly, even under normal operating conditions. Schmidt emphasized this point in the Preface to the third edition: Organic accounting emerged in times of devaluation through inflation. But already in the first edition it was stressed, that the position is a fundamental attitude to the problem of value change of any kind as affecting the enterprise. (Schmidt 1929: ii; third edition of Schmidt 1921, translated) For Schmidt the information purpose of accounting determined the type of adjustment. Since for him the major purpose was to maintain the production potential of the firm, general price-level adjustments (and other index adjustments, reflecting average values) were insufficient (Schmidt 1922a). In a further publication (Schmidt 1922b) he still preferred individual current cost values (Tageswerte) for statement presentation, but admitted that price indices proved indispensable in some situations; he opted for specific indices to reflect price variations between different assets to assure correct managerial decisions. Specific indices were still averages (though different for each asset category), and thus did not precisely reflect the productivity shifts within an inflationary economy. Hence, for Schmidt the use of specific indices was merely a preliminary and ultimately unsatisfactory solution. Thus he did not attempt to separate the effect of general inflation from the shift in specific prices (as did Edwards and Bell 1961 see subsections and ). 3.4 Competing Bilanztheorien Nowhere did the controversy between different accounting theories rage more fiercely than in Germany. There, numerous competing Bilanztheorien emerged, and the battle lasted for over half a century, into the 1970s and beyond. The original contestants were the static, the dynamic and the organic theories (see below). A series of further theories either constituted new developments or sub-categories of those just mentioned. For example: the rechtswissenschaftliche Bilanztheorie (Fischer ; Rehm 1914); the Bilanztheorie of Nicklisch (1903, ); the geldlich-wirtschaftliche Bilanztheorie der Unternehmung (Osbahr 1913); the finanzwirtschaftliche Bilanztheorie (Walb 1926, 1948); the Einheits-Bilanztheorie (Sewering 1925); the eudynamische Bilanztheorie

9 German language area (1) 49 (Sommerfeld 1926); the Riegersche Bilanztheorie (Rieger 1928); the pagatorische Bilanztheorie (Kosiol 1944a, 1944b, 1956); the totale Bilanztheorie (le Coutre 1924) (for translations, see References). The differences between all those theories are many, but usually pivot on the issues of valuation and realization; they also depend on the definition of income, as well as on the conception of what is to be the prime function of accounting. Since Schmalenbach s time this also involved the question of which of the two financial statements, the balance sheet or the income statement, should be given priority. In other words, which of the two functions should be given primary attention, income measurement or asset and capital measurement? The gaps in the various viewpoints were magnified through increasingly sophisticated arguments by each succeeding generation. Hence the competition between different Bilanztheorien also had an impact on other Continental European countries and enhanced the prestige of German accounting theory. Leitner (1905, 1922a 1923, 1929) stood in high repute for his realisticempirical approach to accounting, particularly to cost accounting, though today he is less frequently mentioned than other German accounting scholars. Similarly, Hax s (1926, 1948) analysis of the notion of profit and the valuation of the enterprise as a whole, as well as some later publications, have become classics. Another study concerning the value of the entire enterprise was the one by Käfer (1946). Nicklisch s (1912, ) Multi-Bilanztheorie had been called (by Sellien and Sellien 1956: Vol. 2, col. 2073) a closed universalistic system. It was based on a comprehensive theory of values. Thus, it was a multi-value approach that, however, may have been more closely related to his notion of business economics in general than to his Bilanztheorie. Nicklisch was (with Schär, Osbahr and, to some extent, Schmalenbach) well known for his normative-ethical orientation to business economics and accounting (cf. Mattessich 1995: ). He aimed for a cooperative community within the firm, where not profit or profitability but performance (Leistung) and efficiency (Wirtschaftlichkeit) were the decisive operational criteria, and where the opposition between labour and capital could be eliminated or minimized. According to Schneider (1981b: col. 625) one can find in Nicklisch s (1921b) early endeavours of combining nominal and physical capital maintenance. Furthermore, he conceived the distinction between the Bestände Bilanz (a static point of view) and the Bewegungsbilanz (a dynamic viewpoint). This may be why critics may find it difficult to classify Nicklisch s Bilanztheorie (for a more detailed discussion of Nicklisch s Bilanztheorie, see le Coutre 1939). Nevertheless, Nicklisch was one of the most prestigious figures of academic accounting and one of the earliest opponents of Schmalenbach s version of the dynamic Bilanztheorie. Although Nicklisch is little known in the English accounting and business literature, 13 Schneider points out that until about 1945 Nicklisch and Schmalenbach assume about equal rank, followed by Schmidt and Walb, while Rieger remains the indignant outsider (Schneider 2001: 211, translated). 14

10 50 German language area (1) The Statische Bilanztheorie Also traceable to the nineteenth century (e.g. to Hermann Scheffler) is the static or statische Bilanztheorie although Walb (1933) found dynamic features in Scheffler s work. The older version of the static theory, presented by such authors as Simon (1910) and Rehm (1914), centred on the valuation of assets (as manifested by Hügli 1923, Leitner 1923, and Schär 1911, 1914). The newer, more systematic static theories were defended by Pape (1920, 1925, 1933), le Coutre (1921, 1924, 1926, 1939, 1949), Gerstner (1921), Kalveram (1922), Ziegler (1930) and others. Their most prominent representative was found in le Coutre s totale Bilanztheorie, which concentrated more on correct capital valuation than the valuation of individual assets, emphasizing the use and application of funds. Further emphasis was put on the valuation at acquisition costs, the nominal capital maintenance and the use of a specific as well as detailed classification scheme. More generally, the theory aimed, as its author stated in a later edition, at: the question of the practical purpose [Zweckbestimmung] of the balance sheet as well as the further development of the theory and form of the balance sheet, which leads us to a total balance sheet, i.e., to a Bilanztheorie which represents systematically all relations of the balance sheet to economic life in a formal as well as materially logical accord, i.e., a seamlessly coordinated system. (le Coutre 1956: col. 1172, translated) Schmalenbach s dynamic accounting, and precursors as well as followers In sharp contrast to the static conception stands the dynamische Bilanztheorie, the major goal of which was profit determination. An early prominent but longneglected version of it can be found in Sganzini s (1908) realistische Bilanztheorie (see above). It not only anticipated the much better known version of Schmalenbach, but also foreshadowed important aspects of the latter s improvements by Walb (1924, 1926, 1948), Geldmacher (1929), Kosiol (1944a, 1944b, 1956) and others. The basic ideas of dynamic accounting did not originate with Schmalenbach but point to different sources. Schmalenbach himself declared the work of von Wilmowski (e.g. 1895, 1896) as a major inspiration. Seicht (1970a: 100, 146) found other sources, and (apart from a series of nineteenth-century publications by Strombeck, Scheffler, Schüler, Simon, Staub and Wilmowski) pointed at Rehm (1914), Fischer ( ), Sganzini (1906, 1908, 1910), Skokan (1914) and Müller (1915). Seicht also emphasized that: Although Sganzini s works were published in prominent and for experts easily accessible sources, no author, with the exception of the Swiss Rudolf Borkowsky (1946), mentioned Sganzini and his, seen from a dynamic point of view, sensational theory (Seicht 1970a: 146, translated).

11 German language area (1) 51 As to the followers of Schmalenbach s dynamic accounting during the inter-war period, Sykora (1949: 211) listed Geldmacher, Mahlberg, Haar and Leitner. Further, during the period after the Second World War, Seicht (1970a: ) and others regarded Walb s finanzwirtschaftliche Bilanz and Kosiol s pagatorische Bilanz (see also our Chapter 4) as the major efforts to further develop dynamic accounting and to make it formally and materially consistent (though they may not have fully succeeded in doing so). Schmalenbach s numerous and highly praised contributions to accounting and business, may be classified into the following six areas: (1) His renowned and quite formalistic, yet also controversial dynamische Bilanztheorie (which incited numerous counter-proposals by such eminent opponents as Nicklisch, Schmidt and Rieger and later by Hansen, Honko, Engels, Schneider, Seicht and many others); (2) his various contributions to inflation accounting; (3) his important work in cost accounting and pricing theory; (4) his contributions to the construction and spread of the Kontenpläne (charts of accounts) and a general Kontenrahmen (master chart of accounts); (5) his work in finance theory; and (6) his endeavours towards the creation of the unifying discipline of Betriebswirtschaftslehre (the last two, going beyond accounting, will here not be detailed). The basic feature of Schmalenbach s dynamische Bilanztheorie was a strong emphasis on profit determination, mainly for the purpose of efficiency control. Assets and equities at year-end were for him merely residuals (arising from the flow of expenses and revenues) claiming that their values reflected reality in any sense. This has often been misinterpreted, particularly by authors who believed that Schmalenbach preferred the income statement to the balance sheet. 15 But a careful reading of Schmalenbach s magnum opus shows that this is not the case. On the contrary, Schmalenbach stated that: by analysing the various entries in the cash-book and making up a profit and loss account from them [i.e. in the simplest case from a cash-book], is to making himself a great deal of unnecessary work. He would achieve his goal much quicker if he would forgo his profit and loss account and allow his balance sheet to give him the information he requires. (Schmalenbach 1959: 42 3, translated by Murphy and Most) Thus, Schmalenbach assigned to the Bilanz a dynamic instead of a static task. To relegate income measurement only to the balance sheet instead of the income statement, and to deny the former the task of measuring stocks at year-end, appears perplexing; and regarding the balance sheet with its stock variables as something dynamic seemed absurd. Even many scholars in the German language area, as for example, Rieger or Seicht, have criticized this particular feature: To summarize, one can say that Schmalenbach leaves the proof open for the alleged unscientific status of dualism [i.e. the notion that accounting can

12 52 German language area (1) properly determine income as well as capital or asset values], but that he himself was highly dualistically oriented. Apart from that, Schmalenbach ought to have recognized that his dynamic accounting differs from static interpretations only in the valuation, in the definition of the asset concept, and the manner of periodization, and that the determination of a comparable profit can be secured, in the long-run, only through separation of profit [Gewinnspaltung] but not by an unnecessary abuse of the balance sheet. (Seicht 1970a: 325, translated) This contradiction may be even more puzzling to the British and American reader. Yet only a comparison between both, the German and the English linguistic practice, can explain the ultimate reason behind this potential confusion (see above). Thus, by stressing income determination (rather than stock valuation) at the year-end particularly, when the term Bilanz is seen as referring to financial statements in general it may be easier to understand why Schmalenbach regarded the Bilanz as a dynamic instrument. The more so as both statements are capable of measuring income. However, several authors (Seicht 1970b: 97, 118; Engels 1962: 201) did not regard Schmalenbach s approach as genuinely dynamic. A related explanatory feature of his theory was Schmalenbach s belief that correct income measurement was irreconcilable with correct stock valuation. This monistic view was criticized and refuted by Schmidt (1921) and other scholars who favoured a dualistic approach. Schmalenbach (1959: 34) admitted that: In my experience, when business economists disagree about accounting methods, the difference of opinion arises because the disputants have different objectives in mind. This crucial insight may offer a hint that Schmalenbach may not have considered the entire range of possible accounting objectives, however, he did consider periodic income measurement (guided by the matching principle), income comparability between different periods, controlling the conduct of business (operating efficiency), accountability and ascertaining profit shares. Could these objectives have been attained only by his brand of dynamic accounting? An interesting difference between Schmalenbach s dynamic Bilanztheorie and British or American accounting theory is the fact that Schmalenbach included (in the earlier editions of Dynamische Bilanz) an implied interest on owners equity as well as implied owners salaries under expenses (Aufwand), thus reducing the income figure. This makes sense from a managerial point of view, though less from one of traditional financial accounting. Later editions omitted these and other features, probably to conform more to pertinent legislations a reason why Schneider (2001: 203) speaks of a dilution of the dynamic income notion. It is because of such dilutions that, from a practical point of view, Schmalenbach s dynamic accounting has become less controversial as time went on. As far as valuation is concerned, Schmalenbach, who was a highly pragmatic person, accepted various valuation bases for different asset categories.

13 German language area (1) 53 This multi-value approach was rooted in historical costs (originally without the lower of cost or market value principle), with the possibility of general pricelevel adjustments during inflationary times (see above). Engels pointed out that Schmalenbach uses current values, historical values, and fixed values, without any visible principle... Schmalenbach does not succeed in demonstrating the variety of his valuation approaches as a manifestation of a leading principle (Engels 1962: 200, translated). Schmalenbach himself asserted that as a rule, a reliable valuation approach is to be preferred to a theoretically correct one based on uncertainty and arbitrariness (Schmalenbach 1956: 187, translated). Yet despite this apparently tolerant and pragmatic wisdom, he refused to accept Schmidt s current value basis, and never admitted its ability to generate a relevant valuation of assets concomitantly with correct income determination. He regarded Schmidt s current value accounting as fragmentary and unsystematic (Schmalenbach 1925: 161; cf. Graves et al. 1989: xviii) and criticized its lack of general inflation adjustment. Indeed, the failure to combine his current value accounting with general price level adjustments may have been the greatest weakness of Schmidt s approach it seems Edwards and Bell (1961) were the first to achieve this (real-current value model) fully and most elegantly. 16 Schmalenbach also rejected the present value method for financial statement presentation (except for some depreciation purposes), but accepted it outside the double-entry scheme, mainly for the total valuation of the firm (Schmalenbach ). 17 Finally, variations and extensions of the dynamische Bilanztheorie were developed by Mahlberg (1923), Geldmacher (1923, 1929) and others. The most important of these were Walb s (1924, 1926, 1948) finanzwirtschaftliche Bilanztheorie as well as Kosiol s (1944a, 1944b) pagatorische Bilanztheorie. 18 Schmalenbach s student Ernst Walb was his first major successor who developed his dynamic theory in a consistent way. He shifted from Schmalenbach s emphasis on the balance sheet (as the major means for determining income) to a better recognition of the profit and loss account as an alternative and equal partner. For example: Hence this presentation shows that accounting... possesses the possibility to represent income in two ways: once through recording the money value or price of the exchange-effective performances [erfolgswirksamen tauschwirtschaftlichen Leistungen] per se, and alternatively through recording of the payments that result from them. (Walb 1926: 45, translated) Walb no longer concentrated mainly on the performance stream (Leistungsstrom), but tended to give greater emphasis to the financial flow (Einnahmen/Ausgaben) that went into the opposite direction cf. the graphic comparison of le Coutre s balance sheet scheme with that of Schmalenbach, as depicted in Seicht (1970a: 143). One is almost inclined to see in Walb s (1926) work an endeavour to turn the balance sheet into a flow of funds

14 54 German language area (1) statement (something first developed in British and American accounting during the second half of the nineteenth century though within a separate financial statement), and to which le Coutre might also have aspired. Another interesting aspect of Walb s work is his consideration of the different variations of capital maintenance and their impact on the determination of income (cf. Schneider 2001: 1004) Fritz Schmidt s organic accounting theory, and followers The personalities of the two giants of German accounting were no less opposite than were their views. Schmalenbach, a most charismatic person, came from a humbler house than did Schmidt. The former was eminently practical (more problem-oriented, but less a system builder); willing to consider compromise solutions. The latter had a theoretical vision hardly matched by any other accountant of this period in the German language area; he also was less amenable to compromise. While Schmalenbach was lionized during his lifetime, and his influence was felt deeply in continental Europe during several decades, Schmidt received somewhat less regard during his lifetime. He anticipated the theory of Edwards and Bell (1961) and thus obtained great attention in British and American accounting though decades after his death. Indeed, during the 1970s and 1980s accounting standards and quasi-legislations were proposed or implemented in Great Britain, the United States, Australia, Canada and New Zealand that realized in practice important aspects of Schmidt s basic ideas. This holds particularly for the current value approach of the Financial Accounting Standards Board (FASB 1979). Schmidt tried to develop an accounting and valuation theory that is organic from the viewpoint of connecting the individual firm with the national economy in general. Hence, his theory was intended to mitigate the business cycles instead of reinforcing them through distorted accounting valuations (as, according to his view, historical costs would do). Schmidt s concern with business cycles became more intensive with time. While the first edition of this book (in 1921) does not provide any separate chapter on this topic, the last and third edition (in 1929: ) devotes over 27 pages to the subject of Bilanz und Konjunktur (see also Schmidt 1927a). Above all, he aimed at a theory that would supply correct balance sheet values as well as correct income values: such correctness is only attainable through proper asset valuation. We have to insist on the most rigorous distinction between operating profit, on one side, and capital increase or decrease, on the other side. Schmalenbach acts in his income determination essentially in the same way as we would do; but he deprives himself of the great advantage (for a proper economic measure of the firm) by rejecting a quantitatively clear representation of balance sheet valuation [Vermögensrechnung]. Thus he is forced to strongly push into the foreground the notion of comparability, i.e., the

15 German language area (1) 55 comparison of individual periodic results, and where there are doubts, to prefer comparability over correctness... we [however] will then be able to compare correct income with correct capital value, and determine the profitability of the pertinent period. (Schmidt 1921: 55 6, translated) Another essential merit of Schmidt s theory (1921) lies in his pursuit of physical capital maintenance though his distinctions between realized vs. unrealized gains, and real vs. fictitious gains cannot match the more precise distinctions of Edwards and Bell (1961) (see subsection in this book, and Mattessich 1986, 1995: Chapter 7). Schmidt s treatment of such distinctions was inadequate despite the fact that he may have been the first modern scholar to distinguish between business profit (Umsatzgewinn) versus some holding gains (his Spekulationsgewinne). This is a merit; but apart from an unfortunate terminology, his formulation is insufficient and leads to serious problems. Surprisingly, holding gains are for Schmidt non-existent; though they do arise, they are no real gains (Engels 1962: 204, translated). The situation is hardly better when it comes to the distinction between monetary vs. non-monetary gains. To circumvent a careful analysis of this problem, Schmidt chose a shortcut and recommended keeping accounts receivable and accounts payable in balance, thus avoiding such gains or losses. Had he incorporated into his system the changes in market values (i.e. had he distinguished between monetary vs. non-monetary gains or losses), his conceptual apparatus would have been greatly enriched. This could have created many important insights (e.g. to distinguish better between correct and incorrect investment decisions ex post). Since Schmidt did not explicitly recognize value changes of non-monetary assets as income or losses, these changes were recorded in a Wertberichtigungskonto (value adjustment account) as a part of total owners equity. In contrast to Schmalenbach s monism, Schmidt s dualistic view asserted the possibility of representing realistic values in balance sheet as well as income statement simultaneously (cf. Clarke and Dean 1996: 517). Schmidt s organic current value theory has also been regarded (by Schwantag 1951) as a sophisticated extension of Ciompa s (1910) theory based on sales prices; or, even more appropriately (by Sykora 1949: 220), as an extension of the replacement cost theory of Kovero (see subsection ). The outstanding work of Kovero (1912) promoted the use of current or replacement values (and recognition of unrealized gains as well as losses, though under strict separation from realized gains or losses), thus anticipating crucial aspects of Schmidt s (1921) organische Bilanztheorie (as well as of the Bilanztheorie of the Dutchman, Theo Limperg, 1917). However, no edition of Schmidt s book on the organic Bilanztheorie seems to refer either to Kovero s or to Limperg s work. Yet, Schmidt did defend his theory in a Dutch paper (Schmidt 1923b) be it because of Limperg s belligerent attitude (see also subsections and , as well as note 2 of the Introduction) or for other reasons. Limperg s claim that Schmidt neglected the larger picture of the business was refuted

16 56 German language area (1) repeatedly (e.g. Clarke and Dean 1990). Besides, Schmidt (1927a) even showed that the application of current values in accounting may have a wider and beneficial economic effect on business cycles of the economy as a whole. 19 Clarke and Dean (1996: 518) even suspected here an influence of the early nineteenth century American economist Charles Carey. Variations of Schmidt s organische Bilanztheorie might be those by Großmann (1921, 1922), Isaac (1924, 1929) and others. Sommerfeld s (1926) eudynamische Bilanztheorie also emphasized profit determination, though its major goal was maintenance or even increase of the physical productive capital by means of special reserves. Thereby, to keep up with technological innovations; and the overall economic growth became important, no less than precautions taken against sudden shifts in value or other critical events. As this theory arose out of the inflationary experience, it stressed valuation in gold-mark, as well as in real or quantitative, measures (e.g. with debts, etc. to be discounted to the closing date). It did not consider non-realized and windfall gains (nichtrealisierte Konjunkturgewinne) as genuine profit. A dividend reserve was supposed to secure an even return on capital (cf. Sykora 1949: ; and Wagenhofer 1986: 34 5), similar to some American attempts of smoothing the income stream over time. Sewering s (1925) Einheits-Bilanztheorie suggested the use of market sales values (Veräusserungspreise). It may have anticipated valuations similar to those promoted by Rieger. 20 But, in turn, it may have been anticipated by such scholars as Pantaleoni, Fischer and Pape. Furthermore, in criticizing the Bilanztheorie of Schmidt for not going far enough, Sewering proposed not merely price-adjustments of individual items (as Schmidt did), but also a general inflation adjustment. His ultimate goal was to reconcile the contrasts of the static and the dynamic aspects in a unified theory that adapted the valuation approach to the particular momentary economic situation of the firm (a kind of purpose-oriented or relative valuation, which he recommended particularly for fixed assets). Hence, Sewering s theory emphasized physical capital maintenance and, similar to Edwards and Bell (1961), attempted a proper treatment of different kinds of capital gains (real and fictitious, monetary and non-monetary, etc.) in income or reserve (surplus) accounts. This attempt may even be regarded as having foreshadowed some aspects of the theory of clean surplus that became so prominent during the 1990s in American accounting research Wilhelm Rieger s nominal accounting conception Wilhelm Rieger (1928) tried to avoid the expression theory in accounting, preferring in its place the German word Versuch (attempt). 21 For him bookkeeping transactions reflected a constant process of money transformation in which, by his definition, Aufwand (expense) always was in equilibrium with Ertrag (revenue). He also regarded the closing balance sheet as reflecting a kind of fictitious liquidation of the firm (as previously asserted by von Ullmann 1904). This

17 German language area (1) 57 nominale approach considered the financial statements as a purely monetary calculation (Geldrechnung). Rieger was sceptical towards all valuation methods, none of which he considered as being correct, except the case of liquidation into cash at the end of the firm s life cycle. He even declared that precise valuation is something that goes beyond human capacity (Rieger 1928: 234, translated). Schmidt had already come to a similar conclusion in 1921: the following investigation proves how impossible it is to solve the value problem if one insists on a viewpoint that illuminates the question exclusively within the framework of a single firm. (Schmidt 1921: 35, translated) And yet, Rieger had a preferred value notion, the heutige Wert (today s value) which, however, did not refer to the current or replacement value but to a discounted future sales value. This was interpreted variously in the German literature. According to Schneider (1981b: col. 623; 2001: ) Rieger might have followed in the tracks of such scholars as Fischer ( , 1909), Pantaleoni (1909) and Pape (1925). According to Sykora (1949: 233), on the other hand, there might have been a relation to Sewering s (1925) theory. But since for Rieger the balance sheet was forward looking (in contrast to bookkeeping which looked backward), some might regard him as having foreshadowed the kapitaltheoretischen (present value) approach, introduced to accounting particularly by Canning (1929) in the US, and perhaps anticipated by Enderlen (1936) (Schweitzer 1972: 181). 22 It may be surprising that Rieger saw no need for a profit and loss account, although he admitted its usefulness as a statistical summary. The fact that the profit and loss account can be dispensed with (by shifting its functions to the owners equity account), contradicts the view of such American authors as Littleton and Zimmerman (1962: 47) and others who regard it as an essential ingredient of any doubleentry system. 23 In Rieger (1930) one finds heavy opposition to Schmidt s (1921) organic replacement cost theory, and in his later work (Rieger 1936), an entire book is devoted to the refutation of Schmalenbach s dynamic accounting. Indeed, Rieger s own theory is less well known than his criticism of others. He drew wide attention to the weakness of Schmalenbach s theory (that insisted on the dynamic nature of such a static tool as the balance sheet) with words like this: It still remains a mystery how one should recognize from a point of time [Augenblick], a movement which is supposed to have taken place between several such time points. There, even the best of endeavours fails (Rieger 1936: 21, translated). Rieger was taken to task because his critique of Schmalenbach s theory appeared just at a time when Schmalenbach (whose wife was Jewish) had increasing difficulties with the National Socialist regime. However, the persecution of Schmalenbach (and his hiding) during part of the war, did not extend to his work. The latter remained in high regard among practitioners, scholars and students alike. Either his prestige was so

18 58 German language area (1) high that the National Socialists did not want any publicity about his official disgrace or, less likely, they did not take accounting theory seriously enough to persecute his work. 3.5 Charts and master charts of accounts and state interference Schär s (1911) original idea of a chart of accounts may have experienced a setback due to the First World War, but afterwards the economic climate was all the more receptive to it. Even during the war some trade associations became interested in this idea, and in 1921 the Ausschuß für wirtschaftliche Fertigung des Vereins Deutscher Ingenieure (Committee for Economic Production of the Association of German Engineers) published a basic chart for cost determination. Subsequent discussions and further charts can be found in Calmes (1920: 159; 1922: 48) and a series of lesser known authors. Once inflation was mastered after 1923, renewed interest in the construction of charts of accounts arose, partly out of the legacy of the theories of accounts, partly out of greater receptivity for Government intervention. This interest in charts of accounts was greatly stimulated by the publication of Schmalenbach s (1927, 1938) Kontenrahmen (master chart of accounts), partly due to new ideas introduced by its author, partly to his immense prestige. The novelty was mainly found in the introduction of a new class of neutral accounts, and the separation between Ausgaben (expenditure as cash flow), Aufwand (expenses; for financial accounting) and Kosten (costs; for managerial accounting). But other features made the master chart an influential tool. For example, short-term profit calculation, permanent inventory, decentralized organization, interconnection between financial and cost accounting, the transgression beyond double-entry into statistics, the separation between time costs and unit costs, and the inter-comparison of plants and enterprises. This interest in charts of accounts was officially promoted after 1933 when the state-regulated economy of the Nationalist Socialist regime took over. As to the events between 1933 and 1945, Schmalenbach made the following remark: But then, during the time of Hitler s regime one adopted my somewhat modified master chart of accounts as an obligatory master chart. This was, from an economic point of view, a mistake even in a dual sense.... First, this method makes only sense if one can expect equal advantages of inter-firm comparison in all economic branches.... Second, one should interfere... in a free market economy only where it is urgently required. (Schmalenbach 1948: 61, translated) The quest for charts and master charts of accounts (and their improvements) continued in Continental Europe after the Second World War. For example, Kosiol (1944c, 1962) and Mellerowicz (1949) addressed German charts of accounts, Illetschko (1947) the Austrian one, Käfer (1947), Lohmann (1948), as

19 German language area (1) 59 well as Kosiol (1948) discussed those used in Switzerland and Lohmann (1950) dealt with the master chart of France. 3.6 Cost accounting and its contributions The German tradition of cost accounting goes back to the eighteenth and nineteenth centuries, 24 and was faithfully continued into the twentieth century. Apart from the numerous contributions of Schmalenbach (1899, , 1924, 1925, 1948, 1956 see also Lorentz 1926), other authors contributed greatly. For Germany, Leitner (1905, 1922a, 1922b, 1923, 1929) seems to have offered the first comprehensive and systematic analysis of cost accounting. He stood in high repute for his realistic-empirical approach to accounting, particularly to cost accounting. Lilienthal (1907) described the application of cost accounting to a major firm, and the Verein Deutscher Maschinenbauer (Association of Mechanical Engineers) surveyed the entire industry of engine equipment production as to pertinent costing procedures (cf. Coenenberg and Schoenfeld 1990: 97). Although the procedures described were predominantly technical, one attempted to base the overhead allocations (to departments and products) on causal principles. The labour cost basis still seems to have been predominant, but some authors, including Brunier (1908), were sceptical regarding its accuracy and relevance. Many authors contributed to the literature on cost, factory or industrial accounting. 25 But to comprehend the major developments in German cost accounting, a look at the formal definitional framework of costs, cost theory, system structure and applications seems to be necessary Expenditures, expenses and costs In twentieth-century Germany, more than elsewhere, one discussed intensively basic definitions; and there exists a broad literature on cost notions until the 1970s. At the beginning of the century, one was increasingly concerned with a clear separation between financial and cost accounting probably more than in Anglo-American countries. Heinen (1959: ; 1965: 19) distinguished four (more or less chronological) important steps in this development: (1) equating expenditures (Ausgaben) with costs (Kosten); (2) equating expenses (Aufwand) with costs; (3) differentiating between expenses and costs; and (4) further differentiation in the treatment of costs. He made the following remarks: The development of cost accounting [footnote omitted] finds, first of all, its expression in the change [Wandel] of the cost notion. Beside this, the development is characterized by a more refined costing approach. The perfection of the procedures serving the determination and allocation of costs, as well as a change in the goals of cost accounting, are manifestations of this evolution. Particularly in recent times, has cost accounting increasingly

20 60 German language area (1) been converted to an instrument for the steering of plants [Betriebe] and firms [Unternehmungen]. (Heinen 1965: 19, translated) The first step arose out of the practice in trade, where it seemed appropriate to equate costs with expenditures (cf. Leitner 1922b: 64 75; Nicklisch 1939). In the second step one recognized the necessity to differentiate between cash flows and expenses in periodical accounting, or as was the case with Walb (1926), Geldmacher (1923) and Schmidt (1950: 197), to equated costs with expenses in order to have a single uniform (homogeneous) accounting system within a company. However, Schmalenbach (1919b and later editions) and M.R. Lehmann (1925: 35 74) emphasised the independence of cost accounting in order to control the internal production processes. Thus, the clear separation between the following three categories (also reflected in his master chart) became crucial for Schmalenbach s costing approach: (1) receipts and expenditures (for cash flows) vs. (2) revenues and expenses (for financial accounting) vs. (3) performance (Leistung) and costs (for cost accounting). There were costs (for example, for the activity and the buildings of the owner) without being expenses, on the one side. On the other side, there were expenses (for example, for donations or for interest payments) that were not caused by the production process, and therefore not considered to be costs. This led to an articulate conceptual apparatus with such terms as neutral expenses, neutral costs, etc., characterizing expenses that were not simultaneously costs, and costs that were not simultaneously expenses. Schmalenbach used in his cost accounting system completely different valuation principles (marginal costing) than in his dynamic balance sheet (acquisition costing). Hence, a reconciliation or adjustment of these notions became necessary; and this he executed in his master chart. Only during the last decade of the twentieth century could one observe a return to simpler and more universal costing notions in the German language area. Then, influenced by globalization and financial concepts with greater cash-flow orientation, the connections between cost accounting, financial accounting and investment theory, moved into the foreground The theory of costing In Germany, cost theory was a central issue of research during the entire twentieth century. The objectives were to determine the cost-causing factors and the cost functions. From the very beginning, two different sources fed costing research. The first was based on economic theory (e.g. von Stackelberg s 1932, cost-theoretical research), which derived the cost curve from the production curve, based on the law of diminishing returns (Möller 1941: 10 18). The second direction relied on the traditional cost functions, based on the direct relationship between costs and their causes. For the representatives of this view the major problem of cost accounting consisted in a quasi-mechanistic presentation of the